10 sats \ 3 replies \ @jeff 22 Apr 2022 \ on: 🔥 NOW YOU CAN TRADE BITCOIN OPTIONS ON LN MARKETS MAINNET🐂😎 bitcoin
I want to give you folks, @Koty, some feedback here, cause I genuinely want you to win/improve/take-over-the-world.
This seems orthogonal to something likely to work well. You have layered in some unconventional attributes, almost to the point of inventing new instruments few people will be comfortable trading in size. Maybe I'm wrong, but none the less, I break it down.
Are you guys taking the other side of the trade? I basically jump straight to assuming any risk model ever used for options trading won't work, because the market could move and you won't be able to afford to payout.
There are also lots of option traders, who maintain structurally short theta positions (Eg. buy-write strategies), and this product doesn't even acknowledge that they exist. For the record, the only public-facing option-strategy sold in any crypto ETF, is a buy-write. So, that gives you some indication of how popular that is compared to other strategies.
This is very odd to me. Open interest usually gets rolled, unless the trader is looking to actually execute trades via expiration of the contract. I can't think of a type of trader who wants a single-day option. But, I could be wrong on this one. Maybe you know of a case that exists somewhere. (Maybe mining/electricity/hash-rate-contracts somehow? I dunno.)
This rules out doing almost anything interesting in terms of managing other risk (gamma, theta, vega). You can't put on a ratio-trade of any kind.
I don't think Black Scholes will work very well on these special instruments. You may have some amount of structural arbitrage baked into your price, if you're offering options using BS. Either your customers will be ripped off, or you will be giving away free money.
I'm rusty on BS, but I imagine these things combined, probably somehow invalidate the model.
- a sub-one day expiry.
- the high IV / realized IV of BTC.
- your capital locked up until expiry. This would make the option less liquid, and therefore worth less. I guess. Maybe this is muted, as a rounding error, cause of the 24h expiry but if you ever try the same logic but with longer dated options...it's gonna break down, I think.
- No stable interest rate input; needs to be an assumption. What are you using? Too low? You're screwing your self.
And, just some feedback on semantics...
This is not correct use of that language. If you buy anything, you're going long that instrument. If you short anything, you're borrowing (or writing) that instrument, then selling it. You can go long a call or go long a put. The same way you can write (ie short) a call or a put. To fix the language, it would be: Decide whether you want to buy long or short exposure (ie delta) to the price of BTC. If you're bullish, buy a call. If you're bearish, buy a put. It's really confusing, because you can't sell (or write) contracts on your platform, so it's impossible to be short any of these instruments. You don't even need to use the word "short" on any of the readme anywhere IMO -- given the no-selling.
I know its pedantic, and I might seem like a jerk, but the feedback is aimed to help you all step up your game. Imagine I sat here and didn't share the above? That would be the jerk move, imho. Good luck LN Markets! The stuff above is fixable. Go go go!
Hi Jeff,
Thanks for your input, very valuable to us and much appreciated!!
Here is our reply below.
We hope it makes sense and happy to discuss further!
You can only buy options, not sell them. Are you guys taking the other side of the trade? I basically jump straight to assuming > any risk model ever used for options trading won't work, because the market could move and you won't be able to afford to payout.
Yes we are taking the other side and yes we will be able to afford to payout: we hedge our positions and don't keep first order risk on our side.
There are also lots of option traders, who maintain structurally short theta positions (Eg. buy-write strategies), and this product doesn't even acknowledge that they exist. > For the record, the only public-facing option-strategy sold in any crypto ETF, is a buy- > write. So, that gives you some indication of how popular that is compared to other > > strategies.
We are not currently in the same type of approach. Buy Write is a more complex product (margin management, future funding fee to name a few complexities) and the idea here was to offer the most simple way for our users to try the trading of options. Users pay a premium, enter a trade that expires 24h later. This is more a directional / gamma product which can be compared to taking a fut position (that is also why we offer physical settlement). It does not mean that we won't offer a buy-write strategy!
they expire 1 day after opening the position This is very odd to me. Open interest usually gets rolled, unless the trader is looking to actually execute trades via expiration of the contract. I can't think of a >type of trader who wants a single-day option. But, I could be wrong on this one. >Maybe you know of a case that exists somewhere. (Maybe mining/electricity/hash- rate-contracts somehow? I dunno.)
Again, 1 day was to keep the experience simple in a reasonable time frame so users can see the effect of the options rapidly. When you play gamma, 1 day can be enough. (This is not the case when you're looking for generating returns with the theta of course)
...only 4 strikes... (paraphrasing) This rules out doing almost anything interesting in terms of managing other risk >(gamma, theta, vega). You can't put on a ratio-trade of any kind.
4 strikes (4000 USD wide) for a 24h expiry doesn't look so narrow.
It is computed with Black Scholes formula. I don't think Black Scholes will work very well on these special instruments. You >may have some amount of structural arbitrage baked into your price, if you're >offering options using BS. Either your customers will be ripped off, or you will be >giving away free money
We don't see any issue with using BS for pricing an european option, the only matter is the parameters we use to do it. Interest rate for a 24h expiry has little to no effect on the forward.
And, just some feedback on semantics... Decide whether to buy a call (go long) or a put (go short) This is not correct use of that language. If you buy anything, you're going long that >instrument. If you short anything, you're borrowing (or writing) that instrument, then >selling it. You can go long a call or go long a put. The same way you can write (ie >short) a call or a put. To fix the language, it would be: Decide whether you want to >buy long or short exposure (ie delta) to the price of BTC. If you're bullish, buy a call. >If you're bearish, buy a put. It's really confusing, because you can't sell (or write) >contracts on your platform, so it's impossible to be short any of these instruments. >You don't even need to use the word "short" on any of the readme anywhere IMO -- >given the no-selling.
We wanted to clearly indicate the first order risk the users take in buying a call or a put. “Go short” or “Go Long” is linked to the underlying, not the option, which, we agree, can be misleading. This is not really satisfying and we will probably modify it.
I know its pedantic, and I might seem like a jerk, but the feedback is aimed to help >you all step up your game. Imagine I sat here and didn't share the above? That >would be the jerk move, imho. Good luck LN Markets! The stuff above is fixable. >Go go go!
Thanks a lot for sharing your ideas, this is super valuable for us. Keep in mind that it is only a first iteration on this topic and, depending on how the users react, we will add more products that cover the whole space (vega, theta, smile)
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We hedge our positions
How does this work? Are you hedging on your own exchange somehow or on another exchange?
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@koty or @romain_rouphael, bump! Super curious here.
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